Should I Refinance My Student Loans Right Now?
You may have noticed interest rates hovering at 30-year lows and now wonder whether it’s a good time to refinance your student loans. Well, the answer is: not necessarily. You want to help, not hurt, your financial well-being, your credit score and prospects for future borrowing. So, the choice to refinance your student loans will depend on your unique situation and several other factors. Let’s explore the pros and cons.
The Refinancing Pros
Forty-five million U.S. borrowers owe a collective $1.6 trillion in student loan debt, and many are struggling to make their payments. In fact, student loan debt is the second-highest consumer debt category, behind only mortgage debt. You can save thousands of dollars and pay off loans faster by refinancing them. You can even shop around for the best rates.
The advantages of student loan refinancing:
- Lower monthly payments
- No application fees
- No prepayment penalties
- Flexible repayment terms
- Fixed or variable interest rates
- Discounts for automatic payments
- Consolidation of several loans into one convenient payment
Timing is Everything
Is now the right time? The average student loan is about $30,000, according to US News & World Report, and that’s burdensome, especially to a recent college grad. It can be hard to qualify for refinancing if you have no credit history or just started your job. However, if you’re employed, have a good credit score of 650 or higher and have a stable monthly income, you can start the process. That being said, considering the current economic and political climate, you may want to hold off for a couple of reasons:
- Because of the coronavirus pandemic, student loan payments have been paused through December 31, 2020, so you don’t have to make payments on your federal student loans during this time period. If you’re struggling to make ends meet, this is a welcome break. During this pause, no interest will accrue on your federal student loans. Of course, this pause is only temporary, so if you’re financially able, you may choose to keep paying to keep whittling away the balance. Once you refinance, your federal student loans turn into private loans, so you will not benefit from this pause on payments and interest accrual, according to Forbes.
- President-elect Joe Biden has promised some student loan forgiveness for federal student loans. Although he has not committed to widespread student debt cancellation, according to NBC News, it may behoove you to wait and see if he moves quickly on any aid to student loan borrowers after his inauguration.
The Refinancing Cons
Take into account your unique circumstances to determine whether to refinance your student loans right now. Don’t refinance your student loans at this time if:
- You’re almost done paying them off. You don’t want to add time to your repayment schedule.
- You are worried about losing your job.
- Your credit score is low and you don’t have a cosigner with excellent credit.
- Your interest rate is already low. Your highest-interest-rate debt should get most of your attention.
If you’re experiencing financial difficulties or need forbearance or deferment options, you may prefer to keep your federal student loans outstanding. If you refinance your federal student loans and convert them to private loans, you’ll lose access to federal programs like debt forgiveness or income-driven repayment, which adjusts your monthly payments when you’re having trouble making ends meet.
According to Student Loan Hero, a Lending Tree service, some of these plans even let you spread out payments over 20-25 years and then forgive any remaining balance after that. Private lenders typically don’t offer repayment terms of greater than 20 years but may offer some deferral options in the event of unemployment or other financial challenges. This will vary lender by lender.
The Big Picture
You could try FinAid’s student loan calculator or talk to a trusted advisor to go over the numbers and figure out whether refinancing is right for you. If you decide not to refinance your student loans now, that doesn’t mean you can’t in the future. If your credit score needs work, you can find simple tools to help get your financial life back on track — now and in the future.
Remember, student loans affect credit scores — just like any loan would — based on the amount, terms and payments made. To prepare for applying for a private loan to consolidate and refinance your existing student loans, you may want to check your credit score and report, according to the National Foundation for Credit Counseling. You may even try to rebuild any damage to your credit history with a new credit card, where you prove responsible spending and bill paying. When you have more stable employment and a better credit picture, you can reassess. Don’t rush: Your financial wellbeing is at stake.